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Executives

Brian Olson – CEO

Bonnie Poyer – Executive Assistant

Brad Timon – CFO

Analysts

Michael Legg

Walter Nasdeo

Ted Baker

Keith Selmic

Charles Diggs

Quantum Fuel Systems Technologies Worldwide, Inc. (QTWW) Q2 2012 Earnings Call August 9, 2012 10:00 AM ET

Operator

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Quantum’s scheduled Second Quarter 2012 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the conference over to Brian Olson, Chief Executive Officer. Please go ahead sir.

Brian Olson

Thank you. Good morning ladies and gentlemen, thank you for joining us today on behalf of Quantum technologies. We appreciate the opportunity to report the financials results of second quarter 2012.

Joining me today are Brad Timon, Chief Financial Officer and Bonnie Poyer, Executive Assistant.

Before we get started, we need to read the Safe Harbor statement. Bonnie, would you please read the statement?

Bonnie Poyer

Certain statements made during this call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1985.

Forward-looking statements often addressed are expected future business and financial performance and often contain words such as “may,” “could,” “will,” “should,” “assume,” “expect,” “anticipate,” “plan,” “intend,” “believe,” “predict,” “estimate,” “forecast,” “outlook,” “potential,” or “continue,” or the negative of these terms, and other comparable terminology.

Examples of forward-looking statements made during this call include our expectations regarding growth of CNG sales and sales of our F150 PHEV. Various risks and other factors including those discussed in the risk factor sections contained in our report on 10-KT filed with SEC on March 28, 2012 and are subsequently filed Quarterly Reports on Form 10-Q could cause our actual results to differ materially and adversely from those contemplated by the forward-looking statement.

Forward-looking statements are based on current market conditions, management’s reasonable expectations and assumptions as of the date of this call. The company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements made during this conference call to reflect any change in management assumptions, beliefs or expectations or any change in event, conditions or circumstances upon which any forward-looking statements are based.

Brian Olson

Thank you Bonnie. Before jumping into too much detail or developments, I want to take this opportunity to make a few personal comments about my first few months as CEO.

As most are aware, I became Chief Executive Officer in May of this year. During the last several months, I’ve taken the time to visit customers and stockholders and spend valuable time with the company’s entire employee base.

As I mentioned in the stockholder letter, I’m encouraged by everyone’s support and positive feedback. But even more importantly, I’m excited about the deeply engrained belief they all have in our company. Our stockholder are appreciating implicit value of the opportunity in front of us, our customers have a growing interest in our products and capabilities, and our employees have an unwavering spirit to make this a truly great company and so do I.

We’re making great strides in the business and I want to share with you what I see on the horizon. We’re diligently working on a go-forward strategy for alternative energy automotive business, and we are defining an exciting pathway forward that truly leverages our technology, our products, our capabilities, and our competitive advantages.

We are clearly excited about the opportunity in natural gas, and I will talk about that later. We are absolutely addressing our cost structure and have specific plans to reach profitability. But before I share this outlook, I will first turn it over to Brad for a review of the second quarter financial results.

Brad Timon

Thanks Brian, and good morning everyone. I also just want to say that I echo Brian’s comments and since this is my first earnings as the company’s CFO, I want to say that I’m looking forward to addressing the challenges and opportunities that lie ahead for this company. I’d been with this company for over eight years and I’ve put in a lot of sweat and equity over the years because I’ve always believed in the potential of this company. And I believe that we are now finally in a position to capitalize on the technologies that we have developed over our history. And I can tell you that Brian has my full support, and we have the full support of the organization.

So, with that let’s get the operating results for the second quarter and the first six months of 2012.

On a consolidated basis, the company’s revenues amounted to $5.6 million for the second quarter of 2012 and amounted to $11.6 million over the first six months of 2012. This represents a decline in revenues compared to prior year amounts which were $7.3 million for the second quarter and $14.0 million over the first six months of 2011. The decrease in revenue is primarily due to lower contract revenues recognized in 2012, partially offset by increased shipments of our compressed natural gas fuel storage systems.

Our company’s consolidated operating loss amounted to $6.3 million for the second quarter of 2012, and amounted to $10.7 million over the first six months of 2012. This represents an increase in operating loss as compared to prior year amounts which were $4.3 million for the second quarter and $8.7 million over the first six months of 2011.

Moving to the results for electric drive and fuel systems segments. We experienced some nice growth in our product revenues in the second quarter of 2012. Product revenues of this segment amounted to $4.2 million for the second quarter and amounted to $7.7 million over the first six months of 2012. This represents an increase in product revenues compared to prior year amounts which were $3.0 million for the second quarter and $4.5 million over the first six months of 2011.

The higher product revenues were primarily due to increased shipments of our lightweight compressed natural gas or CNG fuel storage systems, which were partially offset by decline in component shipments to Fisker Automotive related to our Q-drive, hybrid drive system.

Product revenues from CNG storage systems amounted to $5.1 million for the first six months of 2012, which represents an increase of $3.1 million or 178% compared to the prior year six-month period. As of June 30, 2012, our backlog is solely related to CNG tank systems amounted to approximately $13.8 million.

Over the past several months, we have undertaken strides to expand our manufacturing capacity for CNG tank production. Although these efforts will continue into next year, we believe our current capacity as of today will allow for increased levels of shipment of our CNG storage systems during the second half of 2012 as compared to the first half.

Moving on to contract revenues, we have seen a decline in our contract revenues for this segment during 2012. Contract revenues amounted to $1.2 million for the second quarter of 2012, and amounted to $3.6 million over the first six months of 2012. This represents a decrease in contract revenue as compared to prior year amounts which were $4.2 million for the second quarter and $9.4 million over the first six months of 2011.

Contract revenues derived primarily from system development, application engineering and qualification testing of our products and systems under funded contracts with automotive OEMs and other customers. The higher amount of contract revenue recognized in the prior year 2011 periods was mainly due to the level of pre-production engineering services that we provided to Fisker Automotive, during the first six months of 2011 prior to its launch of the Karma Vehicle.

The Electric Drive and Fuel System segment had an operating loss of $2.2 million in the second quarter of 2012 and an operating loss of $3.8 million for the first six months of 2012. This compares to an operating income of $0.4 million in the second quarter of 2011 and an operating income of $0.1 million for the first six months of 2011. The decline in operating income for this segment was partially due to an increase in expense associated with our internally funded programs, which include engineering efforts to advance and integrate our Hybrid control strategies and proprietary software into existing vehicle platforms.

The overall expense for our internal programs increased $1.1 million in the second quarter of 2012, and increased $2.0 million in the first six months of 2012 compared to the prior year period. The increase in expense associated with our internal programs in 2012 is primarily due to increased engineering activities related to our F150 PHEV program under which we are integrating our hybrid proportion system into a Ford F150 truck platform.

Okay, moving to results for our renewable energy segment. Revenues for our renewable energy segment primarily reflect energy sales related to Schneider Power’s two operational wind-farms located in Ontario Canada, a 1.6 megawatt wind farm refer to as the Providence Bay wind farm and a newly completed 10 megawatt Zephyr Wind Farm. Zephyr Wind Farm was acquired by Schneider Power on April 20, 2012 and began the initial ramp of its operations soon thereafter.

I want to point out that Zephyr is not expected to be at full utilization of its wind turbines until late in 2012. At full utilization, we expect the operations to generate approximately $3.0 million in annual revenues. Overall revenues of this segment amounted to $0.2 million for the second quarter of 2012 and amounted to $0.3 million over the first six months of 2012.

Operating losses for this segment were $0.4 million in the second quarter of 2012, and $0.7 million over the first six months of 2012, as compared to operating losses of $0.7 million in the second quarter and $2.3 million over the first six months of the prior year 2011.

Moving into the results of our corporate segment. Our corporate segment represents the general and administrative expenses that indirectly support our Electric Drive and Fuel Systems and our renewable energy operating segments and consists primarily of personal costs, share-based compensation cost, and the general and administrative cost for executives, finance, legal, Human Resources, Investor Relations, and our Board of the Directors.

Our corporate expenses amounted to $3.7 million in the second quarter of 2012 and amounted to $6.1 million for the first six months of 2012. This represents a decrease in corporate expenses as compared to the prior year amounts which were $4.1 million for the second quarter and $6.5 million over the first six months of 2011. Included in the second quarter of 2012 is a net charge of $1.0 million associated with separation agreements executed in connection with May 10, 2012 resignations of our former CEO and our formal Executive Chairman. The charge primarily represents the sum of post employments; schedule cash payments of $.14 million to the former executives as partially offset by the reversal of unvested stock-based awards forfeited and cancel benefits as a result of their resignations.

As of June 30, 2012, about $900,000 of the obligations we made outstanding and are scheduled to be paid in installments through November of 2012. Also included in the second quarter of 2012 in corporate segment is a charge of $0.5 million for the impairment of solar related assets. Included in the prior year second quarter is a charge of $.17 million recognized as of June 30, 2011 in connection with our sublease of a facility located in Lake Forest, California.

Okay, so moving to the results of our non-reporting segment line item. These represent the line items at far below our operating income line. Interest expense amounted to $0.9 million in the second quarter of 2012 and amounted to $4.2 million for the first six months of 2012. This represents an increase in interest expense as compared to prior year amounts which were $0.6 million for the second quarter and $1.4 million over the first six months of 2011.

The increase in expense during 2012 was primarily related to a higher effect of interest rates associated with issuances, debt obligations over the course of the 2011 calendar year which by the nature of their equity linked characteristics such as warrant and debt consumable conversion features, accelerated sureties and or other contractual provisions associated with the issuance of the obligations resulted in a significant amount of non-cash interest charges recognized in the second quarter and the first six months of 2012.

The next line item is share value adjustments and derivatives. Share value adjustments of our derivative instruments which are recorded as non-cash unrealized gains or losses were not significant and only amounted to $0.1 million over the first six months of 2012.

Moving on to recognition of gains and losses related to modifications of debt and derivative instruments. Reflected in our financial statements is a gain of approximately $0.3 million recognized in the second quarter of 2012 in connection with the exchange of certain unsecured convertible notes and warrants issued in October, November 2011 for new unsecured non-convertible bridge notes and warrants issued in June 2012.

Regarding recognition of equity in operating activities of our affiliates which primarily relates to our 25% equity investment in Asola, we recognized a loss of $0.2 million for the second quarter of 2012 and $0.3 million for the first six months of 2012.

The company’s consolidated net loss amounted to $7.1 million for the second quarter of 2012 and amounted to $14.9 million over the first six months of 2012. This represents an increase in net loss as compared to prior year amounts which were $4.3 million for the second quarter and $9.6 million over the first six months of 2011.

Moving to the consolidated balance sheet. I just want to touch on a couple of significant transactions during the quarter. First, I wanted to point that the Zephyr Wind Farm acquisition on April 20 impacted our balance sheet pretty significantly. Schneider Power acquired all of the equity services for a purchase price of $2 million. As a result of the purchase, our consolidated total assets increased by $27.8 million during the second quarter of which $23.8 million related to the equipment and infrastructure associated with the wind turbines.

$1.1 million related to an intangible asset that was identified in connection with the long-term power purchase agreement and the remaining $1.7 million was allocated to get well. In addition, Schneider Power assumed a large debt instrument related to project financing and assumes construction liabilities and a total amount of approximate $25.8 million.

Another set of transactions that I wanted to highlight related to the rolled over of substantially all of $3.95 million of convertible debt that was set to mature in October, November this year. $2.25 million was rolled into a new non-convertible notes that matured in September 2013 and $1.5 million was rolled over in July 2012. Such as of today only 200,000 of the notes from 2011 are currently set to expire in 2012.

As of June 30, 2012, the company had consolidated cash and cash equivalents of $5.6 million, positive working capital of $1.1 million, total assets of $73.4 million and total stockholders’ equity of $28.0 million.

Regarding consolidated cash flows over the first six months of 2012, the company has generated net cash from financing activities of $13.4 million and used some $7.5 million of cash for its operating activities and used $4.1 million for its investing activities. And with that, I will turn it back over to Brian.

Brian Olson

Thank you, Brad. So before I share my vision to the future, I want to provide you some historical perspective on Quantum and the industry. During my transition from CFO to CEO, I personally wanted to take a step back and gain some perspective in that sense where we’ve been and where we today. I thought it would be interesting and valuable to provide you that same perspective.

As a frame of reference on the industry, the global automotive industry produces nearly 70 million vehicles each year, a number that is projected in double over the next two decades. This growth is unsustainable in the fake of dwindling oil reserves and the size awareness of the carbon footprint caused by conventional fuel such as gasoline necessitating unprecedented events in both vehicle proportion technologies as well as alternative fuel systems.

In fact, vehicle drive and fuel systems technology is bounced at faster pace in the last decade than the previous ten decades combined. Quantum is at the forefront of these advancements. In fact, Quantum is been answering the call to reinvent automotive Drive-Train Technology sounds before fashionable.

Over the past decade, Quantum worked on dozens of vehicle development programs worth over $200 million with leading global auto manufacturers as well as government agencies. Together with these partners, we produced advanced products and technologies for tens of thousands of vehicles including hydrogen fuel cell vehicle drive systems, compressed natural gas, CNG systems and hybrid electric plug-in hybrid proportion systems and software.

Our efforts have achieved significant milestones in the industry such as demonstration the lightest hydrogen storage tank in the world’s first 10,000 PSI hydrogen storage system. And the recent launch of high capacity ultra lightweight natural gas fuel storage tanks. These tanks allow a truck to travel 500 miles on compressed natural gas without refueling, an industry breakthrough.

Obviously, Quantum has a history of innovation but we also pride ourselves on our ability to take our concepts all the way to production. Over the years, we have seen approximately 20 different vehicle models become production vehicles and or validated for commercialized used. Our showcase of product features generations of technological breakthroughs like OEM quality, fully engineered and validated CNG pickups, passenger vehicles, and Class A tractors.

Our zero mission hydrogen fuel cell vehicle development programs involved Toyota Highlander, and the GM Equinox. The Equinox made history by amazing in excess of three million miles of real world driving using hydrogen fuel. Our integrated drive system production vehicles include the Ford Escape and the Fisker Karma. The Karma is also controlled by a hybrid controlled software which incorporates hundreds of thousands of lines of proprietary code.

We’ve also innovated fleet solution such as the PHEV Ford F-150 for large users like Florida Power & Light and Dow Chemical. The acceleration of automotive technologies not only becoming faster but more pronounced. The change will be significant that require companies to redefine and reinvent technologies and integrated systems. As an automotive Tier 1 systems integrator with unparallel experience integrating solutions and delivering systems, Quantum is well positioned to meet the growing demand of the clean technology automotive market segment.

Quantum has accomplished a lot impressive and riches to a better company with its best work and opportunity still out in front of it.

Let’s now turn our attention to the future. In the next one of two decades, we will see transformative change in the automotive industry all the way from electronics to vehicle software to vehicle Drive-Train, alternative fuel systems just like in the computer industry or any technology industry advance to start taking foot and then accelerated advancements occur almost vertical advancements.

We’ve seen in the computer science industry and everyone knows it as more as law. How do we know it’s underway in the automotive industry, these we’ve seen dramatic change in automotive technology over the last 10 years, hybrids, electrification, composites, lightweighting, alternative fuel systems, transformative changes underway, companies need to be ready, Quantum is.

Our two decades of experience has prepared us well for our mission going forward. Our mission is to innovate, develop and integrate advance propulsion systems and fuel storage technology, and related fuel systems solutions to drive and support technological change in the automotive industry and deliver value to our stockholders.

This is an exciting time for Quantum. We are in the forefront of what we believe to be an historic opportunity in the alternative fuel industry. The projection show that natural gas vehicle industry alone is expected to rapidly expand over the foreseeable future, growing from several 100,000 per year to date over 3.5 million vehicles by the year 2020. We are receiving significant orders for natural gas systems.

For the year-to-date period ending July 31, 2012 we received new purchase orders that represent a fourfold increase compared to orders received in the same period last year. For the period ending June 30, as Brad just explained we had 178% increase in our tank sales, CNG tank sales. We’ve received orders from leading natural gas vehicle systems integrated for supplying our industry-leading ultra lightweight carbon composite compressed natural gas storage tanks for a variety of transportation applications, ranging from Class 2 or pick-up trucks to Class A large tractor trailers natural gas trucks.

As we see broader infrastructure going into place and rising in variable gas prices as well as the average fuel economy mandate that are taking effect worldwide, consumer, passenger and Class 1 vehicles will gain more momentum. This is great for the alternative fuel industry and for quantum. Our business model is clearly built on the underlying economics of natural gas and will be for quite some time.

Natural gas has a 70% economic advantage today compared to oil and the projections show those advantages is expected to remain for at least the next five to 10 years, most likely longer. These macro developments in CNG as well as the advancement of vehicle electrification are positively impacting our business. We just delivered the first-four F150 PHEV to Florida Power & Light. And in the several months we tripled our CNG tank production capacity and throughput.

In terms of our CNG tank revenues, we expect nearly quadruple tank revenues this calendar year and we expect that trend to continue in 2013 and beyond. And I will talk about that, about something later, we are focusing efforts and developing complete CNG Systems that we believe have the opportunity to expand our CNG business even beyond just tank sales.

In either of that, we are expecting CNG tank sales to drive growth in our business for the remainder of this year and 2013, which based on our current forecast and anticipated CNG tank sales we expect to be profitable in 2013.

And although we have the most advanced lightweight storage technology today, we are not relaxing. Our engineering team has been commissioned to advance our already industry leading tank technology, not only from a technology standpoint but also using technology to drive costs out of the system. The future will require us to advance technology and deliver it economically.

One of our goals is to deliver higher profit margins in the future through technology advancements, volume and market leadership. Our existing focus is not just CNG it does cut across CNG, hybrid and hydrogen vehicles. This focus can be mapped against our business focus with an alternative fuel systems and advanced propulsion systems. We do have a dedicated business unit, advanced propulsion systems that has two decades of power trained development vehicle and system engineering and integration experience.

Our business strategy includes leveraging advanced storage and fuel system solutions we’ve developed in the past to develop complete and integrated CNG fuel systems. In essence, Marion our State of the Art CNG storage systems with our two decades of experience in advanced power training and alternative fuel system development. This is how we started back in 2002 at a point of spin-off or even before 2002, with OEM levels, CNG programs.

We completed five different CNG platforms for General motors, incorporating that complete CNG fuel system, Quantum became the manufacture record. We then developed the Q-drive for Fisker Karma and other electrified vehicles including our four, F150 PHEV. The PHEV F150 is an example of a complete integrated OEM level PHEV drive system.

There are very few companies in the world outside of the OEMs themselves that can deliver a certified and validated OEM level PHEV drive system. We have over $14 million in orders for our PHEV today, PHEV 150 today and expect this order level to expand over the next 12 months with meaningful revenues starting in early to mid-2013. We also have an OEM contract today that we are working on to produce an integrated CNG fuel system for our major OEM program with production slated for 2014.

We are reemphasizing a one-stop shopping solution for our CNG customer base, which will enable us to maximize quality, minimize system costs and leverage our Tier-1 OEM experience. We will continue to provide faster market solutions, yet complete calibrated, certified, validated systems to OEM specifications. And we are not doing this alone. We have strong business relationships that we plan to strengthen, working with general motors and alternative vehicle – fuel vehicle commercialization, Dow Kokam on PHEV and battery commercialization, Dow Chemical and other major chemical companies on material science and composite technology. And we’ve worked with the Department of Energy over the last two decades on the advancement of compressed storage.

Innovation is the cornerstone of this company. You can expect us to continue to innovate cutting edge system solutions by leveraging our existing technology portfolio and integrating our products and software into new vehicle architectures. Architectures that will change the way people drive.

As I mentioned earlier, this is an exciting time for Quantum. The plan is to grow this business, seek out new and expanding partnerships and alliances, and we plan to do this with razor focus and financial discipline.

Let me conclude by stating we are well positioned with our technologies, our capabilities, our product offerings to become sustainable, profitable and lead the charge to innovate vehicle solutions that are in front of us.

Let’s be clear, this is not a reinvention of the company. We will find ways to redefine and reinvent technologies, but that is our basic core competency. It’s our mission to innovate, develop and integrate. We are now completely focused on leveraging these competencies and ways that we have not done in the past. Unleashing this value is what makes me more excited than anything else in this business. And unleashing this value during the transformative period in the automotive industry makes it truly exciting.

Our company has a spirit to innovate a discipline to execute and a will to succeed. I thank you for your support and continued interest in our activities.

Before I turn it over to Q&A, there are two other matters I want to address. One is related to Fisker and the other is related to Schneider Power. With respect to Fisker Automotive, I want to first clear up some misinformation that may be in the marketplace due to comments made by Henrik Fisker in an interview wherein he stated or implied that Quantum is no longer providing services or products to Fisker, for the Fisker Karma vehicle. That is not true. We have been and continue to supply engineering services and product to Fisker for the Fisker Karma vehicle.

As for our current status with Fisker, we did receive a letter from them stating that they believe our component costs is not competitive by more than 10%, thus they believe for the terms of exclusive supply agreement they have the right to resource the components unless we reduced the price of our components. Fisker has not provided us any evidence to support its assertion that our price is not competitive and we’ve been told that Fisker has delivered a similar message to other of its suppliers, not uncommon in the automotive industry.

We’ve had several discussions with Fisker on this subject and expect that further discussions will occur in the near future. At this time, we do not believe that Fisker has resourced any of the components that have the exclusive right to supply. I’ll end by saying we believe strongly in our contract, contractual rights and are confident in our position.

The other matter pertains to Schneider Power. On July 31, we did confirm via Press Release that we have received an unsolicited conditional offer for the purchase of all of the outstanding stock of Schneider power from an officer of Schneider Power. We are evaluating the management buyout, offering identifying other potential opportunities and strategic alternatives for Schneider Power’s renewable energy portfolio.

This is consistent with our communication on May 22, 2012 in which we said, we planned to make strategic assessments of our renewable energy projects and minority owned investments which lie outside of the company’s core automotive technology focus.

With that, we will turn it over to a Q&A period.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Legg.

Michael Legg

Thanks. Morning Brian and Brad. It’s Mike Legg from Roth Capital. Couple of questions. One, you just went over Schneider, so I am glad you address that. On the contract outlook, can you just talk a little bit about where you expect the contract revenues going forward?

Brad Timon

Yeah. I think the kind of level contracts revenue will probably be fairly similar for the second half of 2012. We’ve seen improvement into 2013 but I think in the short term, I think you will see about the same levels as the first half of 2012.

Michael Legg

Okay. I know you mentioned the CNG space you have a $13.8 million backlog. What’s the timeframe on that?

Brad Timon

That will be probably over the next like nine, twelve months. Nine months probably.

Michael Legg

Okay. And…

Brad Timon

We expect to get additional orders as well, obviously. But that’s the current backlog.

Michael Legg

Right.

Brian Olson

That would be based on the timing delivery of those specific purchase orders. So we would – as Brad said, we would have additional orders that would come into and appear but that’s how those are positioned to date to be delivered pursue into the purchase order.

Michael Legg

Okay. Now you delivered your first half 150 to FPL. Can you talk a little bit about that opportunity with FPL and Dow?

Brian Olson

Yeah. I think the opportunity with FPL and Dow is very solid in terms of their commitment on the vehicle. On a combined basis, both organizations on an aggregate have ordered in excess of 300 vehicles. We would see the potential opportunity with both of those organizations. Once they take delivery that there is a possibility they could potentially order additional vehicles. Dow, Qualcomm and Dow Chemical are very supportive of this program. We’ve been in a process over the last 12 months conducting numerous marketing efforts and sales efforts on this vehicle and we believe there is a strong pipeline of interest that has developed. I mean, it will be up at specific gas and electric in San Francisco on another week.

We have received encouraging comments from them and in terms of their interest in the vehicle. We literally have a list of around 50 potential really strong well conditioned, potential opportunities where organizations through drive-in rides, through trade shows that the strong interest has developing from anywhere from I say 30 to 50 organizations. And they are not going to take delivering, place orders until we are able to actually deliver like one or two vehicles which could start to towards the end of this year and nearly 2013. But the feedback has been positive. We scaled our marketing efforts well beyond just this both two organizations and we feel – we feel confident there is a growing interest in that vehicle platform.

Michael Legg

Okay. You then touch on solar, is there anything to say about that right now?

Brian Olson

No. I think we did seen improvement – we did see an improvement year-over-year. I think within the solar industry. Obviously, we just still haven’t seen any re-momentum gain within the solar industry. But it’s been – the results have been fairly consistent this quarter with the prior quarters abstractly. But we have seen some improvement year-over-year.

Michael Legg

Okay. And then the corporate G&A, if you back out the one times, it was about $2.2 million run rate. Is that what we should expect to going forward?

Brad Timon

No. I expect it to improve. I think you will see some improvement in the third and fourth quarter and then you will see more of the full effect of our cost reductions beginning in – probably in the first quarter or second quarter of 2013.

Michael Legg

Okay. So improving, you mean from the normalized $2.2 million?

Brad Timon

Yeah, because we’ve already taken out close to $2 million in annualized executive compensation. So you will start to see that. Obviously, we still have some cash outflows related to some severance payments. But we did take the charge in the second quarter. So I think you will start to see an improvement even in the beginning of third quarter.

Michael Legg

Okay, great. And then when you mentioned 2013 profitability, is that for the full year or is that profitability by year-end?

Brian Olson

That would be – we have based our anticipated, order flow based on, backlog based on where we think orders are going to come in. We do believe we are targeting, have a plan to be profitable for the complete year. Obviously, I am not going to take quarter by quarter. Every quarters will be profitable but I am also saying for the full year when I talk about profitability in 2013. We are targeting to be profitable for the entire 2013.

Michael Legg

Okay, great. Thanks guys.

Brian Olson

Thanks Mike.

Operator

Your next question comes from the line of Walter Nasdeo.

Walter Nasdeo

Thank you. Good morning guys.

Brad Timon

Hi, Walter.

Brian Olson

Good morning.

Walter Nasdeo

Hi. A lot of my questions have already been answered. However, I was – I like to feel little bit clarity on the build-out for capacity for the CNG tanks and what’s your expectation as far as cost, what your capacity, what you are looking for as far as capacity goes when you are done and kind of a timeframe on that?

Brad Timon

Yeah. So our current capacity like Brian said is tripled over the last several months here. But it’s still – we still need to triple that capacity again. And as you probably looking out about $5 million investment over the next six months or so.

Walter Nasdeo

Okay. And that will get you to about what capacity, I mean, triple and triple, what is that going to get you to?

Brian Olson

Somewhere between 10,000 to 12,000 large tank.

Brad Timon

That’s pretty good.

Walter Nasdeo

Okay. Alright.

Brad Timon

It represents somewhere.

Brian Olson

And we are about like you 3,500 annualized capacity right now. So we need to take that to like 10,000 or 12,000 over the next several months.

Brad Timon

You know it will be – just on that alone, without the full system which I mentioned the fact of us been able to provide a full system on certain applications. But just on that absolute tank sale, that would be a revenue range in that $40 million to $45 million depending on tank size and whether it’s Class 2 or Class A. But then the incremental opportunity on the full system could provide even additional revenues on top of that to the extent there is meaningful. But we are not planning – we don’t necessarily have to have that in 2013 to represent what our targets for profitability. That would be incremental to what we are planning for just the tank sale side.

Walter Nasdeo

Got you. And then you mentioned as far as system goes. What are the parts of the natural gas system are you looking to start developing?

Brad Timon

Well, if you look at – if you look at the complete system and then if you go other way into the integration of that system. Let me use I can meaning duty application, you would have – and if you look at Quantum technology all the way from the storage, the storage tank to the certain aspects of valves, the regulation of a compressed natural gas injection system, to the electronics, you would have some impact on the tubing, the racking. So you start developing all the way from the storage to the distribution to the injection and regulation of that natural gas fuel.

We have certain components and Quantum has developed. We have one of the most state-of-the-art hydrogen fuel injectors and we have some development efforts on the CNG side of that as well. But we don’t necessarily have to be the company that provides every component either Walter.

There are certain components that have been commoditized where the true value comes in is been able to take some components whether it’s our componentry or industry leading storage tank and maybe someone else’s valve. And the true value added to our customer lies in the one-stop shopping and the integration validated and integration systems engineering and assembly operations that Quantum bring to the table in which we brought to the table in the past. So I don’t want to leave with you impression that we are going to supplying, providing and manufacturing every component.

We manufacture components that have true intellectual property and we have competitive advantage to manufacture. We would then bring to the party the potential off-the-shelf type componentry but then bring our integration expertise into the equation to be able to deliver that system in an innovative effect of cost effective manner to provide that complete one-stop shopping solution for our CNG customers.

Walter Nasdeo

Got it. Okay. That’s very helpful. Thank you. And then just my last kind of enquiry here. As far as and you mentioned the hydrogen fuel injectors, how much synergy do you see between what you have been doing in the hydrogen even the tanks and the injectors and things like that in the past with what the natural gas opportunity is now? And is just a scale back of complexity or are there actual design changes that have to go into play?

Brian Olson

It’s a different molecule. So, I’ll answer it from two different perspectives, it is a different molecule. It does involve a certain level of more sophistication, more advanced engineering, more, a different set of perhaps application engineering into the vehicle. So, that’s one way to answer it. Now, that’s absolutely a valid answer.

The other way to answer it is, everything we’re doing in compression natural gas today including expanding our ability to manufacture compressed storage tanks, everything we’re doing from establishing higher levels of integration experience and higher levels of being able to do system design in engineering and being able to demonstrate high-throughput. All of that lends itself to the eventual commercialization of hydrogen. And a classic example is when we have our hydrogen – we have several hydrogen development programs underway today.

We visit with our – with these customers, all over the world. These customers also come into our facility and where we’re manufacturing some of these sophisticated products, they see what we’re doing on the compressed natural gas side. They see what we’re doing on validating systems.

They see what we’re doing on electronics and software. They see what we’re doing on vehicle integration. And they are blown away by the expertise, the capabilities what we have to offer, even if its’ – today more in CNG, it makes them feel like this a company that can deliver not only in CNG but can deliver on their hydrogen program as well. And that’s where these two crossover. Because it is compressed gas but it’s also everything we’re doing that CNG can completely be leveraged into the hydrogen programs we have in eventual commercialization.

Walter Nasdeo

All right, that was very helpful. Thank you very much guys.

Brian Olson

You’re welcome.

Operator

Your next question comes from the line of Ted Baker.

Ted Baker

Good morning guys, how are you?

Brian Olson

Good.

Brad Timon

Good.

Brian Olson

Go ahead sir, Ted?

Ted Baker

Yeah. I just wanted to touch base on the share price. And do you guys have any sort of contingency plan in case there is – with the dealers things concerns, should you not meet the requirements, what you’re convincing into that?

Brad Timon

Yeah, I think there, we are in the process of evaluating, though there are different alternatives. And we will continue to assess those different alternatives. I’m just not in a position today just given we’re not at a point where we have to make a decision. But there are several options, alternatives. The company is going to continue to evaluate it. And I apologize, I just don’t have anything definitive today other than, I would just have to continue to assess and evaluate those options as it moves closer.

Ted Baker

Okay. The other thing I had, kind of on a similar note, again being kind of a long-time shareholder, I’ve seen the constant dilution with your – issuing of more shares. And I just wanted to see if you guys could give current shareholders and potential future investors. What kind of assurance could you throw out there that you’re done with the capital rates as in, in terms of issuing more shares and warrants and things like that?

Brian Olson

Yeah, I’ll – and I’ll answer that in two parts. The first part is, we are very sensitive to share-price evaluation, dilution and our capital raising structures. We just completed certain debt offerings. We’ve also put a commercial line of credit in place, which gives us lending, traditional commercial lending opportunities, as well as potential capital opportunities for capital equipment with Bridge Bank.

And we’ve also just secured additional capital through a debt, a straight debt offering, it had one, coverage but effectively was a straight debt offering. We will continue to evaluate our capital needs going forward. And based on what Brad, obviously what Brad said in terms of expanding our tank manufacturing facility, there is going to be required capital in the future. The form of that capital raise could come in the form of additional debt, traditional banking, they could come in the form of equity. I just want to draw a…

Ted Baker

More monetization of some assets.

Brian Olson

Absolutely, our monetization of assets which we talked about Schneider Power and we’re evaluating and assessing everything that is non-core to our growth plan within the automotive space. Having said that, to the extent that we’re raising capital in the future, because we can convert that capital into positive cash flows and be able to generate a return through a higher share price, through better balance sheet, a more solid balance sheet, stronger financial and profitability of the bottom line.

Even though it appears dilutive because of additional shares that’s actually beneficial to our stockholders that we’re raising capital to expand the business and it’s for true growth capital going forward.

So, we will evaluate different financing options. We will also make sure we are growing this company and have the appropriate capital to capitalize on this unbelievable opportunity in natural gas today and be able to capitalize on our leading technologies to e able to deliver future shareholder value, given these opportunities in front of us.

So, I just can’t make any absolute comment nor would I want to give the breath of the opportunities in front of us today. But our capital rate is going forward, whether it’s debt or equity, or asset monetization, is going to be earmarked for true expansion of this business and being able to get this business to profitability.

Ted Baker

Great. Now along those lines, I know you mentioned the interest in Schneider Power. Anything similar on the solar side, any interest in from outside sources to kind of monetize that?

Brian Olson

We, I think just what we put out on, I’ll be repetitive, and it’s probably the extent of what I can say at this point is, is we are in a process, we are assessing certain opportunities. And as they materialize, we’ll obviously, like we did with Schneider Power, put out the appropriate news release, but that’s really the extent of our comments this morning.

Ted Baker

Okay. Even just to back up a little bit on the, I agree with your assessment that if it’s truly for the growth of the company, that’s reasonable from a shareholder perspective. But obviously, as we all know historically, a lot of that has gone for corporate expenses and our operating expenses. So, it’s a just a little bit tough to swallow when that happens historically. But if it’s truly for growth, then I would assume most shareholders really would be appreciative and approve of that.

Brian Olson

We appreciate that.

Ted Baker

So, that’s pretty much all I had. But I just want to close by saying, I do – I certainly appreciate kind of the direction you guys are taking from the cost cutting measures you’ve taken. And your optimism certainly is a welcome change. Thanks guys.

Brian Olson

Thank you.

Brad Timon

Thanks Ted.

Operator

(Operator Instructions). Your next question comes from the line of Aram (inaudible).

Brian Olson

Good morning.

Unidentified Analyst

Hi, how are you?

Brian Olson

Good.

Unidentified Analyst

It’s a similar follow-up to the previous call. You talked about the CapEx you would need to spend for the line expansion. What other elements going to burn rate calculation, it’s obviously important when we’re looking at potential capital raises intuition?

Brad Timon

Well, we have our – we’re going to be launching our F150 PHEV, so there is some obviously some integration and engineering expense that goes with that. We have talked about that our R&D expenses have been increased because of that. So, that’s something that we’re factoring into our Capital needs going forward. So, we’ll just – we’ll see what we need and like Brian said, I think I’ll just leave it at that. We’ve got plenty of options and there is a lot of things in play. And we’ll discuss our options and see where it goes.

Unidentified Analyst

Right. Have you thought about releasing some sort of estimate or burn-rate you put a stick in the ground, and you said you’ll be profitable in ‘13, but have you thought about releasing the amount of capital that you would need to – in order to get there or have you done that in the past?

Brian Olson

No, I mean, I guess on the face of it, it seems like that it would not be something we would do. I can take it under advisement. I think the – I think what we are lean out as the opportunity in front of us and where we can continue to – we’ve done, we’ve reduced a lot of costs. And if you look at the quarter, okay, where is it, it’s coming because we’re still during this transition period, we’re still making payments.

There are other opportunities, real opportunities that we believe will materialize between now and December 31, for additional reductions in our cost structure, additional reductions in cash burns additional opportunities like we laid-out during this whole call that to grow our revenue base.

So, I think it’s a powerful target for us to say, here we are, right on the verge and I know we’re still in the summer months and 2013 may seem like a long way away for lot of people in terms of business planning and in terms of really over – in a six-month period taking the company with the losses we’ve had, I’d say, listen we have a real plan. It’s a pathway, it’s a plan we’re still diligently working on that plan. I don’t want to say it’s a simple plan. We have a lot of the stakes in the ground.

And we’re on this call, willing to say, we really see a clear pathway forward to have this business look completely different in 2013 than where it is today. And I think we just have to leave it to that extent but it’s – it’s a plan that we believe in. It is ambitious. And I believe, I absolutely believe we can get there outside, we went beyond this call this morning, putting that stake in the ground. And I guess, that’s the extent of the comments I can make on that.

Unidentified Analyst

Okay. And then, regarding the backlog you have, usually when production ramps up, if it goes smoothly, when it ramps up after these degree of gross margins should expand. Is that a fair assumption?

Brad Timon

Yeah, we expect our margins to improve on a quarter by quarter basis as we go forward here as we do expand. So, we do see that through volume.

Brian Olson

Through volume and technological advancements and manufacturing efficiencies, all three. We have disciplined approaches that, over the last three months, we are putting a full-court press on being able to drive better margins through higher volumes, technological advancements and manufacturing efficiencies.

Unidentified Analyst

And do you think we should look at the traditional automotive suppliers when sort of extrapolating your gross margin to peek efficiencies. Are we looking at traditional automotive suppliers as a case study or is there someone else that you could point to?

Brian Olson

I think to a certain extent you have to view our product base and the components within our system as having a high degree of technological flavor to them. And we believe we can maintain margins that are higher. And this isn’t to say there isn’t competition out there. There is a lot of competition. And in some areas, we have very little competition and other areas we have a extreme competition. But due to the technological nature of it, it does afford us what we believe it would be a higher margin going forward than what you have seen traditional automotive.

Unidentified Analyst

Okay, great. Thanks for your time.

Brian Olson

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Keith Selmic.

Keith Selmic

Hi, how are you guys doing?

Brian Olson

Hi Keith.

Keith Selmic

Do you follow on giving any insight and knew exactly what happened with Dale and Alan or is that not appropriate?

Brian Olson

Yeah, it’s not appropriate. There was a separation agreement. Obviously we don’t have liberty to discuss the details, diversion views with the board and the business going forward. And really that’s the extent of the comments I can make at this point.

Keith Selmic

Okay. And all my other questions were answered. I just want to wish you guys, good luck moving forward. Hopefully it turns out the way things have turned out.

Brian Olson

We appreciate that. Thank you.

Brad Timon

Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Charles Diggs.

Brian Olson

Yeah, good morning.

Charles Diggs

This is Charles, and much like the previous caller, I just wish to congratulate fairly smooth transition to both, you and Brad, Brian and Brad. And I feel comfortable having you guys good to know.

Brian Olson

Well, thank you.

Brad Timon

Yeah, I appreciate that.

Brian Olson

We appreciate that. And like I said, in my opening comments, the encouragement of the positive feedback from – and I’ve been with the company for a while, which is the positive feedback from customers and stockholders and employees and no transition is easy. But I’m so encourage by just the support I’ve received out there and been in front of our customers and giving them assurances. And so, I appreciate your comments and by wholeheartedly, like I said, appreciate everyone’s support through this process.

Charles Diggs

Keep up the good work.

Brian Olson

Thank you.

Operator

(Operator Instructions). At this time, there are no additional questions.

Brian Olson

Okay. Well, I would – I will conclude the call by once again thanking everyone for their support and continued interest in our activities. And we will talk to you again at the third quarter financial results call. Thank you.

Operator

Thank you. This concludes today’s conference, you may now disconnect.

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